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  Fundamentals suggest it's almost time for bottom fishing

BENJ GALLANDER and BEN STADELMANN

Saturday, September 1, 2001

The Contra Guys usually see pretty much eye-to-eye when assessing stocks, but once in a while we find it harder to achieve a content consensus. It is ironic that the company in question, Denison Mines Ltd. (DEN-TSE), is arguably the least important in the lineup, accounting for a minuscule share of the portfolio.

We considered dumping this stock when the price convincingly approached the 20-cent level on a broad-based uranium rally. A hasty retreat back to 14 cents scotched that idea. Still, we believe there is an excellent chance for the stock to rebound to that upper range, with our target of 38 cents an achievable long shot. If that's the case, how about buying a bit more to make the catch worthwhile? It's the angler's dilemma: Is it time to fish or cut bait?

The McClean Lake uranium mining and milling facility in Saskatchewan has been running well, but operational costs have been high, and the revenue goes straight to paying off the hefty loan from Denison's partner, Cogema SA, the French nuclear fuel processing giant. Future prospects for profitability rest on increasing mining reserves and reducing processing costs by running the mill at high capacity and closing in slow periods.

These specifics rest within the broad context of a brightening future for nuclear power. As the Three Mile Island and Chernobyl accidents fade into distant memory, awareness is growing that the nuclear industry has learned a lot about running these plants and has built an admirable operating record. Not long ago, the future of older plants, such as Bruce A, Ontario's flagship on Lake Huron, was in limbo. After a long-term agreement to lease the facility to British Energy PLC, two mothballed reactors will be refurbished and are slated to be back on-line in 2003.

As nuclear safety concerns recede, fears regarding the ever-increasing amounts of carbon dioxide in the atmosphere are growing. Climatologists remain engaged in hot debate over whether global warming is a reality, but the sheer fact that humankind has the ability — and is apparently addicted — to changing the composition of the air that we breathe, is intuitively unsettling. Hydroelectric power faces natural expansion limitations, and the eco-alternatives of solar, wind, biomass and tidal power are difficult to scale up for serious wattage. That leaves nuclear power.

Denison's other main source of income, oil-well royalties from Ecuador, has dried up. To show some decent earnings for 2001, the belt is being tightened another notch with a 15 percent reduction in general corporate expenses. Lower income tax expenses may help, too. The environmental business brings in a little extra, but this sideshow act isn't about to do any heavy lifting. In all likelihood, revenue and the bottom line will swoon until the fourth quarter, when McClean Lake should be firing on all cylinders.

A wild card that remains outstanding is the appeal of a Greek court award of up to $13 million for Denison's ill-fated Mediterranean oil wells. On the face of it, the charge appears ridiculous, but the firm's batting average in the courtroom is worse than Stockwell Day's ability to keep former allies onside. Getting this item off the books might remove a caution flag for potential buyers.

So where does that leave us? The fundamental ratios are appealing: price/earnings of five, book value of 23.5 cents and debt/equity that is high but improving. The combination of uranium and oil and gas is a long-term winner. But despite CEO Peter Farmer's efforts, there is a sense that this corporation remains in the clutches of its long history of woe and tribulation.

At this price, we will maintain our "Hold" rating, but if the stock repeats its pattern of listlessly drifting lower between bouts of relative optimism, it will become easier for us to agree to bottom-fish once again.


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